Announces Acquisition of Comfortaire Corporation and an Additional Strategic Investment

MINNEAPOLIS--(BUSINESS WIRE)-- Select Comfort Corporation (NAS: SCSS) today reported fourth-quarter and full-year 2012 results for the period ended Dec. 29, 2012. Select Comfort also announced the purchase of the business and assets of Comfortaire Corporation and an additional strategic investment to support innovation and further strengthen the company's competitive advantages.

Fourth-quarter Financial Summary

Net sales increased 17% to a fourth-quarter record of $221 million, up from $189 million in the fourth quarter of 2011.

Operating income decreased 3% to $19.4 million, and, as a percentage of net sales, was 8.8% compared to 10.6% in the fourth quarter of 2011. Operating margin decreased 180 basis points year-over-year, which included a 250 basis-point increase in sales and marketing expenses and a 30 basis-point increase in research and development expenses. This was partially offset by a 60 basis-point improvement in gross margin and a 50 basis-point decrease in general and administrative (G&A) expenses.

Earnings per diluted share for the quarter were $0.22, a 19% decrease vs. $0.27 per diluted share in the fourth quarter of 2011. Fourth-quarter 2011 results included a $1.9 million, or $0.03 per diluted share, non-recurring net decrease to income-tax expense related to the favorable resolution of prior-years' tax matters.

During the quarter, the company opened 20 new stores and closed four, ending the year at 410 stores, 19% of which were in the non-mall format.

Average retail sales per comparable store on a trailing 12-month basis reached a record $2.2 million, 26% higher than prior-year.

Full-year 2012 Financial Summary

Net sales increased 26% to a record $935 million, up from $743 million in 2011.

Company-controlled comparable sales grew 23%.

Results included a $5.6 million, or $0.06 per diluted share, non-recurring, non-cash charge in the first quarter associated with the June 1, 2012 chief executive officer (CEO) transition.

Adjusted operating income increased 39% to a record $125.4 million (excluding the CEO transition charge), and, as a percentage of net sales, was a record 13.4% compared to 12.2% for 2011.

The 120 basis-point, year-over-year increase in adjusted operating margin included a 70 basis-point decrease in G&A expenses and a 50 basis-point improvement in gross margin.

Earnings per diluted share on a GAAP basis were a record $1.37, a 28% increase vs. $1.07 per diluted share in 2011. Adjusted earnings per diluted share were $1.43 (excluding the CEO transition charge), which were 34% higher than 2011.

The company opened 57 new stores and closed 28 in 2012; year-end store count of 410 was 8% higher than year-end 2011.

"We are extremely pleased with our record 2012 annual performance and the progress we've made toward our long-term goals. That said, fourth-quarter results were negatively impacted by a significant sales slow-down the last two weeks of December. We also invested in marketing production and testing, as well as product and service innovation, from which we expect to benefit in the current year and beyond," said Shelly Ibach, president and CEO, Select Comfort.

"In the first few weeks of 2013, sales trends have quickly normalized. We will execute our growth strategy with operational discipline as we advance marketing, product innovation and market development. We remain committed to delivering an unparalleled sleep experience for our customers as we continue progressing toward our goal of at least $1.5 billion in sales and 15 percent operating margin by 2015."

Cash from operating activities was $101 million for full-year 2012 compared to $91 million in 2011. Capital expenditures for full-year 2012 increased to $52 million as compared to $24 million in 2011, driven by increased investment in stores and information systems. During the fourth quarter, the company returned $10 million to shareholders through the repurchase of 0.4 million shares of its common stock, bringing the total share repurchases year-to-date to $30 million, or 1.1 million shares. As of the end of the quarter, cash, cash equivalents and marketable-debt securities totaled $178 million, and the company had no borrowings under its revolving credit facility.

Financial OutlookThe company expects to generate full-year 2013 earnings per diluted share of between $1.65 and $1.80, a 15% to 26% increase vs. full-year 2012 adjusted earnings per diluted share of $1.43. This outlook reflects a company-controlled comparable sales growth target of at least 10 percent and a net increase in store count from 410 at year-end 2012 to between 435 and 445 by year-end 2013.

The company currently anticipates that 2013 capital expenditures will be $70-$80 million, reflecting new stores, relocated and remodeled stores, along with continued investment in customer-management systems. While the company's first priority for capital deployment is to invest in sustained profitable growth, it currently plans to continue repurchasing shares in 2013, with the objective of maintaining share count at current levels.

Acquisition and Additional Strategic InvestmentThe company also today announced the purchase of the business and assets of Comfortaire Corporation, a manufacturer and marketer of adjustable air-supported sleep systems, in a $15.5 million transaction that closed on Jan. 17, 2013.

"This investment progresses our role as the leader in delivering innovative products as part of an individualized sleep experience, while also strengthening our company's competitive advantages. Specifically, with Comfortaire, we anticipate benefits from the convergence of intellectual property," explained Ibach. "We also are pleased that the second-largest adjustable air-bed company - with its experienced team and shared commitment to quality, innovation and individualization - is now part of Select Comfort."

Select Comfort purchased the business and assets of Comfortaire from mattress manufacturer, Park Place Corporation. Comfortaire is a privately held company with 2012 revenues of $10.5 million that manufactures and markets adjustable air-supported sleep systems. Founded in 1981, the company is headquartered in Greenville, S.C., and employs 24 professionals. Select Comfort will continue to operate the Comfortaire business through an independent subsidiary.

The company also committed $4.5 million for a minority equity investment in one of its strategic product-development partners. This investment complements the company's current R&D capabilities and is associated with products scheduled to launch during the next 12-24 months.

Both transactions are being funded solely through the company's internally generated cash reserves.

Conference Call InformationManagement will host its regularly scheduled conference call to discuss the company's results at 5 p.m. EST (4 p.m. CST; 2 p.m. PST) today. To listen to the call, please dial (800) 593-9959 (international participants dial (517) 308-9340) and reference the passcode "Sleep." To access the webcast, please visit the investor relations area of the Sleep Number website at http://www.sleepnumber.com/eng/aboutus/InvestorRelations.cfm. The webcast replay will remain available for approximately 60 days.

About Select Comfort CorporationSelect Comfort Corporation is leading the industry in delivering an unparalleled sleep experience by offering consumers high-quality, innovative and individualized sleep solutions and services, which include a complete line of SLEEP NUMBER® beds and bedding. The company is the exclusive manufacturer, marketer, retailer and servicer of the revolutionary Sleep Number bed, which allows individuals to adjust the firmness and support of each side at the touch of a button. The company offers further personalization through its solutions-focused line of Sleep Number pillows, sheets and other bedding products. And as the only national specialty-mattress retailer, consumers can take advantage of an enhanced mattress-buying experience at one of more than 400 Sleep Number stores across the country, online at SleepNumber.com, or via phone at (800) Sleep Number or (800) 753-3768.

About Comfortaire CorporationHeadquartered in Greenville, S.C., Comfortaire has been delivering Individualized Sleep Experiences™ for over 30 years. The company started by inventing an air bed that provided an independently adjustable surface utilizing latex-cotton air chambers. While Comfortaire's original product designs have been the industry standard for over 30 years, the company's mission today is to continue developing innovative sleep solutions designed to provide the ultimate levels of individual sleep comfort. For additional information, visit the company's website at Comfortaire.com.

About Park Place CorporationPark Place Corporation, founded in 1931 as Orders Mattress Company, is headquartered in Greenville, S.C., on a 40-acre campus in a Century 2000, state-of-the-art designed facility. Park Place has manufactured mattresses primarily under the Park Place, King Koil and Comfortaire brands. For more information, visit ParkPlaceCorp.com.

Forward-looking StatementsStatements used in this news release relating to future plans, events, financial results or performance are forward-looking statements subject to certain risks and uncertainties including, among others, such factors as general and industry economic trends; consumer confidence; the effectiveness of the company's marketing messages; the efficiency of its advertising and promotional efforts; consumer acceptance of its products, product quality, innovation and brand image; availability of attractive and cost-effective consumer credit options; execution of the company's retail store distribution strategy; the company's dependence on significant suppliers, and its ability to maintain relationships with key suppliers, including several sole-source suppliers; the vulnerability of key suppliers to recessionary pressures, labor negotiations, liquidity concerns or other factors; rising commodity costs and other inflationary pressures; industry competition; the company's ability to continue to improve its product line; warranty expenses; risks of pending and potentially unforeseen litigation; increasing government regulations, which have added or will add cost pressures and process changes to ensure compliance; the adequacy of the company's management information systems to meet the evolving needs of its business and evolving regulatory standards applicable to data privacy and security; the company's ability to attract and retain senior leadership and other key employees, including qualified sales professionals; and uncertainties arising from global events, such as terrorist attacks or a pandemic outbreak, or the threat of such events. Additional information concerning these and other risks and uncertainties is contained in the company's filings with the Securities and Exchange Commission (SEC), including the Annual Report on Form 10-K, and other periodic reports filed with the SEC. The company has no obligation to publicly update or revise any of the forward-looking statements in this news release.